Chapters IV, V and VI

In today’s entry, I will finish my initial summary and analysis of The Economic Consequences of the Peace. My hope is that by Sunday evening I will have at least bare bones sketch of my presentation for our Faculty Festival of Achievement. And with my colleague’s permission, I will post both my presentation and his.

There is a persistent thread that runs through The Economic Consequences: We can make a choice between two very different visions of how to conduct political and economic relations between nations.  We can choose between the vision of Clemenceau or the vision of Wilson. Keynes makes his choice clear: in his view, a world political economy organized along the lines of liberal principles can at least potentially lead to mutually beneficial gains for all parties. Of course, the Keynes of The General Theory departs significantly from Classical Liberalism. At what point Keynes break with Liberalism in matters of economic policy occurred is a bit beyond today’s entry, but my own view is that this probably didn’t really happen until he at least had most of The General Theory in his head.  But it should be noted that aside from his support for freer trade, the arguments in The Economic Consequences are not necessarily supportive of the extremes of laissez faire. There is a clear recognition in Keynes that the maintenance of liberal institutions would require international coordination and the construction of institutions. At the end of The Economic Consequences, Keynes lays out his alternative vision of undoing the damage of Versailles. I think it is possible to see some seeds of Keynes’ later writings in his vision for undoing the damage of Versailles.

In Chapter IV, Keynes explains why he views the Treaty of Versailles as a betrayal of Wilson’s 14 points and the terms laid down in the Armistice agreement. In Chapter V, which I’ll address shortly, he provides an explanation of why this happened. The remainder of Chapter IV is devoted to explaining how the damage done by the Treaty of Versailles actually disorders the German economy. Keynes asserts that Germany’s economy depended on Overseas Commerce, the exploitation of coal and iron and industries dependent on coal and iron, and the system of tariffs and transport. The provisions of Versailles systematically disrupt this system and if implemented, would prevent German recovery.

In Chapter V, Keynes attributes the departure from Wilson’s 14 points and the terms of the Armistice to shameless pandering to public opinion by politicians and a discovery that Germany’s position was actually weaker than had been previously believed by the Allied Powers. In Britain, Lloyd George succumbed to the “hang the Kaiser” crowd and vowed to make Germany pay for all the costs of the war. Thus rather than conducting a scientific analysis of what Germany could actually pay, the settlement at Versailles was driven by emotion and a desire to crush Germany. Keynes then devotes significant space to his own analysis to show that the conditions of Versailles would reduce Germany to ruin and starvation.

In Chapter VI Keynes explains what is wrong with the treaty and offers proposals to remedy this. Specifically, Keynes notes that WWI (not surprisingly) had devastated Europe. What is lacking according to Keynes is a mechanism to provide for the rehabilitation of Europe. Not only did the war leave Europe physically devastated but it also created significant distortions in currencies and price levels. In addition, it created a structure of indebtedness.

What is Keynes’ solution? As he puts it “we must escape from the atmosphere and methods of Paris.” Keynes’ holds out little hope for  a revision of the Treaty from the League of Nations due to its structure.  He does however argue that a trade treaty in the form of a Customs Union could help to offset the damage of Versailles by reintegrating economic zones that he feared would be disrupted by Versailles. Keynes’ argument is in one sense thoroughly neoclassical and implicitly rests on the view there are mutual gains from trade based on specialization and division of labor. So it is tempting to dismiss Keynes on this point as being naïve about the impact of trade.  But as Keynes notes, in many ways Europe had de facto customs unions before the war as many of the newly created states had been part of multinational empires.

The second component of Keynes’ solution is a settlement of debts. The third component is American loans. However, Keynes does not think the U.S. should loan existing European governments money unless and until they are committed to rectifying the situation. It is difficult to read this part and to not think immediately of Keynes vision for Bretton Woods and Charles Kindleberger’s masterful analysis of the international imbalances that contributed to the Great Depression in The World in Depression. In my view, there is a recognition here by Keynes of the dangers of financial instability and the need for liquidity to address the problems of imbalances and debt.

Finally, Keynes turns his attention to the relations of Central Europe to Russia. It is here that Keynes demonstrates a clear preference for stability and order. He is concerned about the threat of the Spartacists (revolutionary socialists) in Germany whose possible triumph he views as potentially disastrous. However, he is near prophetic when he points to the very real dangers of a revived militaristic, authoritarian and ultranationalist right in Germany which he views as equally, if not more destabilizing. He does not advocate intervention in Russia but instead proposes a policy of peace with Russia while buttressing the centrist forces in Germany and elsewhere.

Keynes concludes The Economic Consequences of the Peace with the following:

“We have been moved already beyond endurance, and need rest. Never in the lifetime of men now living has the universal element in the soul of man burnt so dimly.

For these reasons the true voice of the new generation has not yet spoken, and silent opinion is not yet formed. To the formation of the general opinion of the future I dedicate this book.”



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